Market slaps down bold Telkom growth strategy
The new strategy — which is in response to Telkom facing real competition for the first time in its history — was slammed by the market. The share fell 7,7% to R148,50 as analysts expressed concerns about the impact of the plan on dividends, and also about Telkom cutting its forecast for earnings before interest, tax, depreciation and amortisation (Ebitda) margins.
Briefing analysts at a presentation in Pretoria yesterday, the message from Telkom executives was that the good times may be over for now but the new strategy was aimed at growing revenue streams in the longer term.
The expected squeeze on Telkom’s revenue and margins was mainly from increased competition. Government is to announce measures this month to further open the market, and the second national phone operator is to start operating this year.
In addition, government has called on Telkom to reduce prices to help SA’s new economic growth strategy, Asgi-SA; consumers want more sophisticated products and the regulator is implementing tighter rules. “We are acutely aware that the landscape is changing,” said Telkom CEO Papi Molotsane yesterday.
As a result, Telkom would invest about half of the R30bn in a new network, dubbed the next generation network, of which broadband was a key element. The network would support a wide range of services, including voice, data and multimedia.
Molotsane said the strategy also focused heavily on boosting customer service and envisioned Telkom being the market leader in three countries outside SA. Nigeria and Kenya were among the countries that Telkom was looking at, although it had also held talks with Portugal Telecom.
“Their guidance of R30bn capex over five years is a bit concerning. A lot of people have been buying into the stock for the dividend yield and that may impinge on the dividend in future,” said Warren Hammond at Andisa Securities.
Telkom chief financial officer Kaushik Patel said Telkom expected revenue, which grew 6,5% to R43bn in 2004/5, to be flat or to fall slightly in the coming years due to the tighter regulations and competition while costs and gearing would rise due to the investment plans.
Analysts questioned why Telkom cut its forecast of Ebitda margins to 37%-40% in the year to March 31 2007, against a previous forecast of 44%. Patel said Telkom had long warned that regulations and the second national phone operator would have an impact.
“Well, it’s here,” he said.
Telkom expected to lose 10%- 15% market share to the new phone operator over time. However, management had developed the new strategy in order to limit the impact of this.
“We are making acquisitions, launching new products and accelerating broadband, (which) will incur costs but will generate long-term value,” he said. Last week, Telkom firmed up its R2,43bn bid for information technology firm Business Connexion as part of its move to diversify into other areas.
Molotsane said that within three to five years, Telkom hoped to achieve 20% broadband penetration. The investment would help Telkom to offer customers a “triple-play” bundle which was popular internationally. This involved voice telephony, broadband internet access and television.
Telkom was also reviewing its broadband prices.
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